Roth conversions

Whether you are looking to convert Traditional IRA’s or 401k’s, here is a look at seven things that you need to know about the 2010 Roth IRA conversion rules.

1.  Rules on Income Limits.

Whether you are filing as an individual or married filing joint, the adjusted gross income level of $100,000 will become nonexistent for the Roth IRA  conversions of 2010.  For higher wage earners, this is a prime opportunity to convert money into the Roth IRA to allow your money to have tax-free growth at retirement.

2.  If you change your mind after you convert your Traditional IRA to Roth…

you can always do an IRA recharacterization by October 15th of year you convert.

3.  2010 is the year of conversion but not the year the tax is due.

While 2010 is the actual year that you will be able to convert, the income to be claimed can be deferred until 2011 and 2012.  Expecting a vast majority to take advantage of this, the IRS has set up special provision on how the tax will be paid.  The IRS has granted you the option to claim 50% of the conversion amount as income in 2011 and the remaining 50% in 2012.  Keep in mind that this is only in 2010.  After 2010 the taxes will all be paid in full the following year going forward.

If you elect to pay the tax over the two year period, keep in mind that the tax rate is determined for that year only.   Example, in 2011 you will pay the tax based on your tax bracket for that year.   If your income were to somehow sky rocket in 2012, then you will be paying more in taxes that year for the conversion.

What if husband and wife want to convert? Each IRA(s) is tied directly to the Social Security number of the account owner.  What that means is that if a husband wants to convert his IRA’s and the wife does not, that’s okay.  Further more, if both want to convert, then the husband can choose the two year option on paying the tax and the wife could choose to pay her tax in 2010 (or vice versa).  Remember that you have to do one or another.  For example, if the husband has multiple IRA’s that he is looking to convert, he can’t choose to pay the tax this year on one IRA, then defer the other IRA for 2011 and 2012.

4.  Convert but Can’t Contribute

Just because the conversion limit of $100,000 AGI is lifted, doesn’t mean that the income restrictions are lifted for new contributions into the Roth.  If you’re over the phase out limits of the Roth IRA contribution, you will not be  able to contribute new money to the Roth.  There is a backdoor approach to this and that allows you contribute to a non-deductible IRA and then right immediately after wards convert it to a Roth IRA and avoid all taxable consequence.  It’s a nice loophole that still allows you to continue to contribute to the Roth and benefit from the tax-free money.

5.  Convert Traditional IRAs and Old 401(k)s.

The 2010 conversion is not limited to just your traditional IRA.  If you have any old 401(k)s or any other retirement plans from a previous employer, those will also be allowed to convert as well.  Might be a good idea to convert them all.  Be conscious if you are converting after tax contributions in an IRA (non-deductible IRA).  The tax rules can get a bit complicated.  Follow these steps to figure out how much tax you will owe.

6.  What’s the Cost Basis?

If you have an old 401(k) that you have rolled over into an IRA, the question might be what do you use as the original tax basis?  In  the face of the 2010 conversion or any conversion in general the basis, or the amount that you will be taxed on, is the amount of the account at the time of conversion.  For example, if you had an old 401(k) that was worth $45,000 and rolled it over into an IRA, and now that IRA is only valued at 25,000, the 25,000 is the amount you’ll use for your basis.  If you elect to do the conversion at 25,000 and then as the year goes by and the account drops more, the option might able to do what’s called an IRA recharacterization.

*Restrictions, penalties and taxes may apply.  Unless certain criteria is met, Roth IRA owners must be 59 1/2 or older and have held the IRA for 5 years before tax-free withdrawals are permitted.

Roth IRA Conversion Calculators: Should You Convert?

January 26, 2010

2010 is the year of the mighty Roth IRA conversion and many boomers are wondering if it’s the right thing to do.  The sound of tax-free money is a sweet lullaby, but is it worth the up front tax expense?Everybody’s situation is different and it’s hard to say if it’s right for you.  If you are on the bubble, here’s a comprehensive list of Roth IRA conversion calculators that you can plug in some numbers and see if it makes sense.

Reasons to do a Roth IRA Conversion

There are several reasons that a Roth IRA conversion makes complete sense.  Here are a few:

  • A larger sum to bequeath to heirs. Since required minimum distributions (RMDs) do not apply for Roth IRAs as they do for traditional IRAs, investors who do not need the money may leave it invested as long as they choose, which may result in a larger balance for heirs. After an account owner’s death, beneficiaries are required to take distributions, although different rules apply for spouses as opposed to children and other non-spousal beneficiaries.
  • Tax-free withdrawals on qualified distributions. Withdrawals from a Roth IRA are tax-free for those who have had the money invested for five years or more and have reached the age of 59½ or have attained another qualifying event.

Which Is Right for You?

If you have a traditional IRA and are considering converting to a Roth IRA, here are a few factors to consider:

  • A conversion may be more attractive the further you are from retirement. The longer your earnings can grow, the more time you have to compensate for the associated tax bill.
  • Your current and future tax brackets will affect which IRA is best for you. If you expect to be in a lower tax bracket during retirement, sticking with a traditional IRA could be the best option because your RMDs during retirement will be taxed at a correspondingly lower rate than amounts converted today. On the other hand, if you anticipate being in a higher tax bracket, the ability to take tax-free distributions from a Roth IRA could be an attractive benefit.

There is no easy answer to the question: “Should I convert my traditional IRA to a Roth IRA?” As with any major financial consideration, careful consultation with a professional is a good idea before you make your choice.

List of Roth IRA Conversion Calculators

Disclaimer: Roth IRA conversion calculators are not created equal.A calculator — whether found on the web or nestled in a more sophisticated financial planning software package — isn’t a bad jumping-off point when trying to assess whether it makes sense for someone to convert his or her retirement assets to a Roth individual retirement account. But it is hardly the final word on the matter.  Be sure to meet with a Certified Financial Planner or tax advisor before implementing the Roth IRA conversion.

If you plan to cash in on the favorable Roth conversion rules this year…

Consider using separate Roth IRAs for different asset classes. That way,
if one segment of your Roth investments drops while the others increase in value,
you can switch the underperforming account back to an IRA tax and penalty free.
This strategy gives you maximum flexibility. If you timely file your 2010 return,
you will have until Oct. 17, 2011 to decide whether you are better off unconverting.
The $100,000 adjusted gross income limit on conversions ended after Dec. 31, 2009,
and anyone converting this year can elect to defer the income tax bill on the switch.
Half the income can be reported on 2011 returns and the balance the following year.
Seniors who are thinking of converting should note a couple of tax traps:
The extra income from converting can affect Medicare Part B premiums.
Upper incomers have to pay a monthly surcharge on top of their regular premium.
The surcharge starts at $85,000 of AGI for singles and $170,000 for married couples,
rising to 220% of the basic premium for single filers with income above $214,000
and married couples with AGI over $428,000. In computing AGI for the surcharge,
Roth conversion income is counted. That can cause Part B premiums to increase
by up to about $3,000 a year per person. So if you report all that income in 2010
you may see your 2012 premium skyrocket. If you spread the conversion income
over 2011 and 2012, you may owe higher Part B premiums in 2013 and 2014.
There’s a similar effect with Social Security benefits. Lower income seniors
who convert may see more of their benefits taxed because of that additional income.
But seniors won’t have to take required minimum payouts from their Roths.
That will trim their AGIs in future years. And any payouts they take will be tax free.

Capital Gains Tax rates

Tax-Free Capital Gains Redux

Some will pay 0% capital-gains taxes on their 2009 profits.

By Mary Beth Franklin

December 4, 2009

The stock market’s rebound from its nadir in March means many investors are back in the money. And a growing number of investors may be able to cash in their profits tax-free if they sell winning assets before year-end. The 0% rate applies to long-term capital gains scored by taxpayers in the lowest two tax brackets. Likely candidates to benefit this year include retirees who don’t have to take a distribution from their IRAs this year, allowing them to hold down their taxable income, and millions of unemployed Americans who may need to tap their investments for needed cash.

The 0% capital-gains rate on investment profits and dividends for those in the 10% and 15% income-tax brackets first appeared last year, and the break is scheduled to continue through 2010. To qualify for preferential treatment for long-term capital gains, you must hold shares of your stocks or mutual funds for more than a year before selling. (This applies to assets in taxable accounts, not those in retirement accounts. Profits inside a tax shelter are not taxed when the gains are realized but are taxed at your ordinary rates upon withdrawal.) Short-term capital gains on assets held less than a year are taxed at a maximum 35%.

To take advantage of the 0% capital-gains rate this year, your taxable income can’t exceed $33,950 if you are single, $45,500 if you are a single head of household or $67,900 if you are married filing jointly. Note that taxable income is what’s left after you subtract personal exemptions — worth $3,650 each this year for you, your spouse and your dependents — and your itemized deductions or standard deduction from your adjusted gross income. (The standard deduction for 2009 is $5,700 for individuals, $8,350 for heads of household and $11,400 for married couples. Plus, there’s an added standard deduction of $1,100 per person for married people 65 or older and $1,400 for single filers 65 or older.)

Any gains that lift your income above that threshold would be taxed at the maximum 15% capital-gains rate.

One group of taxpayers won’t benefit from the zero capital-gains rate: children affected by the recently expanded “kiddie tax.” Dependent children younger than 19 and full-time students younger than 24 are affected by the special rule that applies their parents’ higher tax rate to their investment income in excess of $1,900 in 2009.

This page printed from:

The third estimated tax payment is due on September 15th.

The third estimated tax payment is due on September 15th.

Estimated payments are required when you have extra income, such as from freelancing, rental income or investment income on which no taxes are automatically withheld. The IRS will add a penalty for underpaying your federal taxes if you owe more than $1,000.  This penalty is basically an interest charge for paying the IRS late.  Currently, the IRS interest rate on underpayments is 4%.  This penalty can be avoided as long as your total payments to the IRS (withholding plus estimated payments) are the lower of either 90% of this year’s tax (2010) or 100% of last year’s tax (2009).  So you’ll want to figure out how much extra tax you’ll need to pay in from your side job.  The easiest calculation is to use your marginal tax bracket for 2009, and add in the 15.3% self-employment tax.  This calculation actually overestimates your taxes, but it’s a good place to start if you want to keep the math simple.

Call for an appointment to calculate the ACTUAL estimated payment necessary based on your profit.

If you want to prepare it yourself the Estimated voucher and instructions for calculating the payment are available at

Independent Contractor or Employee?

Independent Contractor (Self-Employed) or Employee?

It is critical that you, the business owner, correctly determine whether the individuals providing services for your company are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

If you are an independent contractor and hire or subcontract work to others, you will want to review the information in this section to determine whether individuals you hire are independent contractors (subcontractors) or employees.

Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be –

People such as lawyers, contractors, subcontractors and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case.

The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute (statutory employees) for certain employment tax purposes if they fall within any one of the following four categories and meet the three conditions described under Social Security and Medicare taxes, below.

  • A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
  • A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
  • An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.
  • A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson’s principal business activity.

Refer to the Salesperson section located in Publication 15-A, Employer’s Supplemental Tax Guide (PDF) for additional information.

Social Security and Medicare Taxes

Withhold Social Security and Medicare taxes from the wages of statutory employees if all three of the following conditions apply.

  • The service contract states or implies that substantially all the services are to be performed personally by them.
  • They do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation facilities).
  • The services are performed on a continuing basis for the same payer.
There are generally two categories of statutory nonemployees: direct sellers and licensed real estate agents. They are treated as self-employed for all Federal tax purposes, including income and employment taxes, if:

  • Substantially all payments for their services as direct sellers or real estate agents are directly related to sales or other output, rather than to the number of hours worked, and
  • Their services are performed under a written contract providing that they will not be treated as employees for Federal tax purposes.

Refer to information on Direct Sellers located in Publication 15-A, Employer’s Supplemental Tax Guide (PDF) for additional information.

In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.

The behavioral control factors fall into the categories of:

  • Type of instructions given
  • Degree of instruction
  • Evaluation systems
  • Training

Types of Instructions Given

An employee is generally subject to the business’s instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.

  • When and where to do the work.
  • What tools or equipment to use.
  • What workers to hire or to assist with the work.
  • Where to purchase supplies and services.
  • What work must be performed by a specified individual.
  • What order or sequence to follow when performing the work.

Degree of Instruction

Degree of Instruction means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee.  Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.

Note: The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.

Evaluation System

If an evaluation system measures the details of how the work is performed, then these factors would point to an employee.

If the evaluation system measures just the end result, then this can point to either an independent contractor or an employee.


If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way.  This is strong evidence that the worker is an employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship. However, independent contractors ordinarily use their own methods.

2.  Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job.

The financial control factors fall into the categories of:

  • Significant investment
  • Unreimbursed expenses
  • Opportunity for profit or loss
  • Services available to the market
  • Method of payment

Significant investment

An independent contractor often has a significant investment in the equipment he or she uses in working for someone else.  However, in many occupations, such as construction, workers spend thousands of dollars on the tools and equipment they use and are still considered to be employees. There are no precise dollar limits that must be met in order to have a significant investment.  Furthermore, a significant investment is not necessary for independent contractor status as some types of work simply do not require large expenditures.

Unreimbursed expenses

Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business.

Opportunity for profit or loss

The opportunity to make a profit or loss is another important factor.  If a worker has a significant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker has a greater opportunity to lose money (i.e., their expenses will exceed their income from the work).  Having the possibility of incurring a loss indicates that the worker is an independent contractor.

Services available to the market

An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.

Method of payment

An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

3.  Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Type of relationship refers to facts that show how the worker and business perceive their relationship to each other.

The factors, for the type of relationship between two parties, generally fall into the categories of:

  • Written contracts
  • Employee benefits
  • Permanency of the relationship
  • Services provided as key activity of the business

Written Contracts

Although a contract may state that the worker is an employee or an independent contractor, this is not sufficient to determine the worker’s status.  The IRS is not required to follow a contract stating that the worker is an independent contractor, responsible for paying his or her own self employment tax.  How the parties work together determines whether the worker is an employee or an independent contractor.

Employee Benefits

Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance.  Businesses generally do not grant these benefits to independent contractors.  However, the lack of these types of benefits does not necessarily mean the worker is an independent contractor.

Permanency of the Relationship

If you hire a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.

Services Provided as Key Activity of the Business

If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities.  For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work.  This would indicate an employer-employee relationship.

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at by selecting the Small Business link.

Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).